FAMILY DOLLAR good or bad investment

21 Replies

I have seen a New Family dollar in a small town for 1 million at 8% cap rate and NN for 10 year lease. 

Any thoughts on Family Dollar as investment as I will be doing this as all cash? Its in Oakland,IL.

Just never done a NN(roof) and never thought of a Family Dollar as investment?

How much?

The only other concern is not being able to get my money out because it’s a small town

@A.R Shakir I've never owned a dollar store but I did a bit of research on them when I was looking at one for sale. One thing I would caution you to look at especially in a small town is their ability to move and rebuild just down the street when the lease is up. They're usually just a metal building so if there is lots of vacant, cheap land right by the store be careful. 

I had someone tell me that has happened to them and I saw a family dollar do just that in my town. The old owner did well by converting it into a warehouse type liquor store though because it's in a fairly good location.

Not trying to scare you off it, just something to think about when you're doing due diligence.

Thanks @Jeff Kehl , I appreciate the input that is my biggest concern. I probably will not ever be able to re-sell this if they leave and hard to rent if they leave as well.

Have no clue why you would want a Family Dollar NN in a cold belt state for an 8 cap and pay all cash??

Out of the 3 Dollar General is investment grade BBB- or better. Family Dollar and Dollar Tree are currently credit rated but not investment grade.

Investment grade tenants lenders tend to give the best loans on them.

I would only buy a Dollar Store if upgraded construction which is only about 20% of them today and it was in a strong location.

NN in a cold belt state depending on the lease you could have constant maintenance in a cold belt state for weather.

If you have 1 million then you might be able to buy a property in a 2 to 3 million dollar range. I would rather buy a 2 to 3 top with national tenants in a strong location for the high 7's or even 8 cap. In IL, WI,MI,etc. there are some higher cap properties right now.  Your dirt value is much better and with a loan instead of a straight cash purchase you could increase cash on cash another 2 to 3% and hit an 11% return versus a straight 8. Really the straight 8 cap is not an 8 cap when the NN maintenance kicks in.

In a small town like that sounds more better suited for  a local investor living there adding to the portfolio.

If you want Dollar Stores a Dollar General NNN in a stronger area for 7's in cap rate makes more sense.

I think we might have spoken a year ago on NNN but I am not sure.

All the best.

@A.R Shakir So I'm not a commercial broker but there's a similar Dollar General/Family Dollar/ish building for sale where I invest.  Well, it's not really the store itself but the former shell of one.  Why is it for sale?  They literally moved across the street to another building when their lease was up.  Now there's a shell that's too large for anyone really to move into and it was the anchor building in that little strip mall.  I don't know Oakland, IL but if land is cheap, the store isn't in a densely populated area, you have to think through where you'll be in 10 years.  If they move across the street are there other tenants that would (reasonably) want to lease a structure that big?  The population of Oakland, IL looks to be 800 so I'm guessing the answer is "no".

So it's hard for me to say yes vs. no but that's my single anecdotal experience looking at a similar situation in a slightly rural suburb of where I invest.

@Joel Owens

The 8%cap is the only thing that is attractive, but I agree. It's just hard to find 7% ROI when you have 1 million in cash. Even if you get a loan the cash on cash returns are still not at that 7-8% range.

I will try looking at some DG's, I appreciate the input!

@Andrew Johnson

I appreciate the input, 1 million in cash doesn't get the returns that you hope for anymore...maybe stock market!

Again I do not understand WHY you are wanting to buy all cash??

You can have a 3 top ( I have a client right now) looking at one in WI. 8 cap at about 2.8 million. Putting 30% down you can get in some cases a full non-recourse loan with a 7 to 10 year fixed term in the 4's for interest rate and a 25 to 30 year amortization.

So off the down payment you get about 10% to 11% cash on cash going in.

You have 3 tenants versus the one so if one goes out you should be at break even or better on the loan. With a single tenant if it goes dark even paying all cash there will be re-tenanting costs and if in a small area the rents for second generational tenant might be less than original tenant eroding equity value. You still then have TI, attorney legal costs for new lease, and any leasing commissions to pay out. The remote area the property might sit for a long time with no income.

Originally posted by @A.R Shakir :

@Andrew Johnson

I appreciate the input, 1 million in cash doesn't get the returns that you hope for anymore...maybe stock market!

Most asset classes are expensive because interest rates are artificially low (among other market forces).  If you buy all cash, you have to pay the high asset price without getting the benefit of the cause of the high price.  At that point, you are simply over-paying.

@Mike Dymski
Thanks Mike, the only issue for low cap tenants like McDonalds or Taco Bell corporate without buying cash, then you really leverage and make not that much cash on cash return. Unless you go for a higher cap rate tenant.

Originally posted by @A.R Shakir :

Mike Dymski
Thanks Mike, the only issue for low cap tenants like McDonalds or Taco Bell corporate without buying cash, then you really leverage and make not that much cash on cash return. Unless you go for a higher cap rate tenant.

Leverage will increase your cash on cash return whether it's a McDonalds or a single family home.  It's up to each of us on what asset class we are interested in.

If you are looking for a higher yield and to stay passive, you may want to explore syndications in mobile home parks, self-storage, apartments, etc.

@A.R Shakir , 8% is good for this time in the market but when you dig just a little it's coming at the expense of a short lease and exposure to roof expenses in a northern clime.  I'm watching a client right now painfully trying to re-purpose an old Ben Franklin building in one of those towns.  The Alco moved in and then the Dollar Tree came in as well.  Sites are plentiful and cheap in a small municipality both for tenants to leave to and for new competition to come in.

@A.R Shakir , what is your plan if they pack up and move out at the end of the lease? You'll have 10 ksf of vacant metal building in a town with less than a thousand people and a bad climate, so it'll stay vacant possibly forever while you deal with outflows for taxes, insurance, and high maintenence. It's a terrible deal at the asking price. What this sounds like is some preferred developer trying to monetize part of his portfolio that he doesn't want to keep. 

Originally posted by @A.R Shakir :

@Andrew Johnson

I appreciate the input, 1 million in cash doesn't get the returns that you hope for anymore...maybe stock market!

A.R Shakir, I faced a similar challenge a few years ago and wrote a blog post about the investment opportunities I considered and my thought process in selecting them at https://www.biggerpockets.com/blogs/10305/67660-fi...

A large portion of the decision comes down to your liquidity needs, risk tolerance and desire for control (active/passive investor).

As mentioned, you should look into syndication if you have not already. You can start as a passive investor and if you want can lead a syndication. 

If you send me a PM, I can share some resources where accredited investors share their opportunities and thoughts with peers.

Mcdonald's, Chick Fil-a etc. are usually 4 or 5 caps tops.

Most investors buy those all cash. The key with those is the BLENDED cap rate over time. So if you have a 15 year primary lease term as the years go down on an STNL property the cap rate tends to go UP on resale. That can be fine if you have generous rental increases in the primary term to have a great cap rate down the line to sell.

If a developer is amortizing TI into the deal with above markets rents AND they gave the tenant only something like 1% annual increases then as the years wind down you would have a tough time selling that asset under those lease terms.

The goal in worst case scenario would be to make cash flow passively off of the investment in the primary term. Then when you go to sell with rental increases be able to sell at a level with inflation accounted for that would get you close to a break even price so you do not lose any down payment.

With 2 to 3 tops the blended cap rate over time and value is not as affected because they are underwritten differently. You have some cap rate rise as leases come due but not that much as STNL.

I have some friends that sell a bunch of the larger big box stuff 30 million etc. and the properties either get bought up real fast by REIT's and funds or they sit forever and do not sell. Most investors are staying away from big box anchored type centers and going for smaller centers with a mix of tenants where the income stream percentage is more diversified.

If it's a Publix or Kroger anchored center, Lowe's, Costco,etc. then those can be strong. You have to be really picky on the big box stuff these days to invest in.

STNL sub 2 million there is a large buyer pool so cap rates are more compressed. When you go 3 to 4 million then things really start opening up some on cap rate where you could land in the 7's on some tenants. Sub 2 million really for a 7.0 cap Dollar Stores is about all there is except for maybe a Subway etc.

I think buyers really do not think properly about these investments. I would rather spend 2 million on a great property in a great location with 600k down then buy a mediocre property at 1.4 million and I am putting 450k down. Even though 150k less down almost all of the 450k down payment is at risk plus the loan being under 1 million the loan terms are not that great.

The other way 150k more down but the 600k is much better protected with the quality of the asset purchase and dirt value and the loan the can be achieved is much better as above 1 million loan much more lenders will compete with it. I have daily conversations with buyers and their mis-perceptions about the space and loan with yield and security of the leases. They believe it to be one way and it is totally opposite from that.       

@Joel Owens

All great points Joel! I think folks like myself want to ROI on there cash, but we forget the inherent land value, as in some cases you need to be able to liquidate.

Everyone wants that happy balance and that is always the tough part. DG's are tempting but I feel too many are being built. 

The only disagreement I have is I have not seen any 5 cap McDonalds, maybe low 4's and Chick Filet high 3 caps.

Hi Shakir,

I see 5 caps all the time.

Having said that you might be in a market that is more cap rate compressed for that product. Remember I have clients all over the country and review up to 1,000 properties a week. Different states for retail have varying land values, construction costs, and asking cap rates.

I know varying cap rates by state.

There is also a difference between a sale leaseback on an older Mcdonald's being re-imaged versus a brand new build with a developer. Whether the area is rural, suburban, or urban in nature makes an impact on cap rate and pricing as well.

DG's again I believe in only buying the top 20% that have upgraded construction and in strong suburban markets. I do not like the ones in the middle of nowhere and they have sheet metal sides and backs. Developers build those on thin margins and usually only profit 200k to 300k per store.

As an example if their is a DG with an okay location wanting 1.8 million with cheap construction and rent is flat for 10 years at a 6.5 cap I would rather own a QSR in a much better location and construction with rental increases. Over time the blended cap rate could catch up and pass the DG and you tend to have a much better real estate location.

People buy the crap out of the DG's all the time but I do not like them as much.

If someone has 1 million down and is flat rent then buy a Walgreens or CVS in an amazing location for 3 to 4 million with 10k to 12k sq ft building, 1.5 to 2 premium acres on a hard corner with a red light.  

Great potential. They are a subsidiary of Dollar Tree now and high credit. I closed on 6 of them last few weeks, and my clients own probably another 10 more. All very happy with their investments. 

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